Commonwealth Defends Ban on Commission-based Retirement Products

Commonwealth Financial Network’s decision to prohibit its 1,650 brokers and advisors from selling commission-based products in retirement accounts to meet the Department of Labor’s new fiduciary rule is reverberating through the independent brokerage community.

Both companies made their decisions to comply with the Department of Labor’s imminent conflict-of-interest rule that will prohibit brokers from selling investment products in retirement accounts based on their own, rather than their customers’, best interests.

View Commonwealth’s press announcement

The rule permits commission-based sales if brokers issue customers so-called best-interest contracts, an exemption that Merrill and Commonwealth believe will be difficult to implement and monitor and subject them to huge litigation risk.

“We understand that this is going to interrupt business as usual, and you never want to inconvenience people,” said John Rooney, Commonwealth’s managing principal discussing the need for brokers to repaper commission-based individual retirement and qualified-plan accounts. “But to try and comply with the DOL (best interest exemption) is going to be an enormous undertaking and you would still be at risk. We felt it would be a hopeless endeavor.”

Commonwealth, based jointly in Boston and San Diego, operates through brokers who are independent contractors rather than employees. Such brokers keep a much higher percentage of commissions and fees than those at conventional firms but are particularly vulnerable to the DOL rule because independent firms sell a much higher percentage of private real estate investment trusts, limited partnerships, variable annuities other high-commission products than do conventional brokerage firms.

Commonwealth officials like to position the firm as somewhat unique, however, saying more than 70% of its total revenue comes from fees and less than 10% is derived from commissions on retirement accounts.

“It’s not nearly as big an issue here as at other places,” Rooney said when asked if he thought competitors will follow Commonwealth. Rivals such as LPL Financial that have big businesses running brokerage operations for banks will find fee-only policies particularly difficult because their “glorified tellers” rarely have the qualifications or experience to sell fee-based advisory accounts, he said.

LPL, the biggest independent broker-dealer with more than 14,000 brokers, did not respond to a request for comment.

However, hours after Commonwealth announced its policy to its workforce on Monday night, LPL Chairman and CEO Mark Casady : “We are supporting all forms of advice under the new standards to allow choice, lower cost and independence.”

In a prepared statement, Commonwealth acknowledged the investor-choice argument. “Although we have taken this step in relation to retirement accounts, we continue to believe that a commission-based approach remains an attractive and appropriate option for many investors—and thus we will continue supporting that option for non-retirement accounts,” it said.

Commonwealth, to be sure, had “extensive discussions” with many of its brokers in advance of its announcement because “you’d be crazy to announce this in vacuum,” Rooney said.

The biggest risk for Commonwealth is in losing brokers who sell a lot of “alternative” investments, such as privately traded REITs, from sponsors that do not offer fee-based compensation.

“We’re willing to take the chance,” Rooney said. “I’d be shocked if we saw a material number of them exit.”

Why act like you are doing something noble when you still offer the same commissioned based accounts in non IRA’s.

That essentially shows your decision has nothing to do with what’s right for the client. That is why LPL’s decision to give the client the choice seems to make a lot more sense to me.

And a company representative calling bank advisors “glorified tellers”? Is a pretty big generalization and not very professional. I get what they were attempting to maybe say but it’s pretty ignorant. Perhaps along with the policy of allowing a client to pay a commission in one type of account but not another.

Having two different sets of rules for qualified and non-qualified accounts is going to be confusing to the client and is contradictory by it’s very nature. I have been a Financial Advisor for 32 years and have always looked to provide investment advice that meets the needs of my clients, as mutually determined through the detailed personal needs analysis of the financial planning process. Some clients and their specific investment needs and strategies are better suited for an annual advisory compensation model and some will be better served by a commission per transaction basis.
It is hypocritical for the DOL to hold the opinion that the entire financial services industry has been unfairly taking advantage of clients holding “qualified” accounts, but allowing for them to continue paying those same commissions in their “non-qualified” accounts. This two tiered approach puts the financial advisor in the difficult position of trying to explain the logic of the DOL which is now implying that the entire investment community has been mistreating clients within their IRA accounts but it is still “business as usual” with a BICE for their non-IRA accounts. It doesn’t make sense to hold different accounts of the same client to two different standards. As the old saying goes “one cannot be a little bit pregnant”. You either are or are not. The DOL must realize the unintended consequences of this flawed approach as many firms will choose to leave these clients to try to fend for themselves for fear of facing increasing legal actions due to this misguided ruling.

A well thought out, clear, and logical comment…cheers….exactly why the DOL and the current administration will never EVER think in those terms….sad for us advisors that have always done the right thing for our clients….and even sadder for John Q. Public who are the ones who ultimately bear the brunt of the DOLs horrible policy.